How can China win a trade war? A Beijing think tank offers its top tips

Private investment and the European Union could be two sources of strength to counter China’s row with the United States, a report says

PUBLISHED : Wednesday, 18 July, 2018, 10:16am
UPDATED : Wednesday, 18 July, 2018, 11:19pm

China should spur private investment and consumption at home and ally with the European Union and Japan to help win a trade war against the US, a Chinese think tank has said, as Washington and Beijing engage in tit-for-tat tariffs.

In a report on Tuesday, Renmin University’s National Academy of Development and Strategy also said China should increase the dependence of multinationals on the Chinese market “by importing their products to China or enabling their localised production and sales” as another way to counterbalance the unilateralism of US President Donald Trump.

At the same time, China must be “flexible” in its tariff retaliation list and tighten controls over cross-border capital flows, it said.

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Many of the suggestions are in line with China’s existing playbook and action taken since Trump escalated the hostilities with threats of another US$200 billion of Chinese goods with a 10 per cent tariff. China and the US had already exchanged 25 per cent tariffs on US$34 billion of each other’s goods.

China has taken the case to the World Trade Organisation for arbitration, but it has not yet announced any specific countermeasures.

“To fight US trade protectionism, [we] should make use of the different interests among countries to deepen economic cooperation with Japan, the EU, the Association of Southeast Asian Nations, Japan and Russia,” the report said.

The report was released a day after the annual China-EU Summit in Beijing, where there were signs of progress on a bilateral investment treaty.

But Renmin University professor Yu Chunhai, who co-authored the report, cautioned that the basis of cooperation between China and the EU cooperation was “not solid as we thought” because there was not much European involvement in the value chain of US-bound Chinese products.

On the home front, the think tank suggested that China boost domestic consumption by freeing up restrictions on private investment in areas like health care, education, tourism and social security.

China should also make the yuan exchange rate “more flexible” – a hint that Beijing might allow a greater yuan appreciation – and improve capital account controls to minimise impacts from “the US dollar and US monetary policy on Chinese monetary, financial and economic situation”.

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Mei Xinyu, a researcher affiliated with China’s Ministry of Commerce, agreed with the suggestions, saying China had to improve its economic ties with the EU and Japan and use the trade war as a “pressure test” to spot economic vulnerabilities.

Renmin University vice-president Liu Yuanchun said the country had entered a “real period of difficulty” because the trade war came in the middle of “painful” structural adjustment for the country.

Liu said the row had already put a dent in investor confidence in the Chinese stock market and currency.

“We need to fine-tune our policies to offset a series of shocks, particularly external shocks … The trade war [with the US] is absolutely not based on economic but political logic. It won’t end immediately but to escalate step by step,” he said.